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Archive for the ‘Risk’ Category

Simon Johnson: Enormous Risk on Economic Horizon

Posted by Larry Doyle on June 25th, 2012 7:56 AM |

What is my risk?

In the throes of evaluating any and all proposals or investment opportunities,  I always want to understand where the risks lie and just how great those risks may be. From there, I try to evaluate if the projected return on invested capital is attractive relative to the risks undertaken.

What are the risks investors face? Interest rate risk, credit (i.e default) risk, volatility risk, structure risk, counterparty credit risk, prepayment risk, general market risk, liquidity risk, extension risk, transparency risk, political risk, and currency risk. Well, if that were not enough to consider, there is another very real risk lurking on our economic horizon.  What might that be?  (more…)

Janet Napolitano Should Listen to Larry Johnson

Posted by Larry Doyle on December 29th, 2009 10:46 AM |

The mission of  Sense on Cents is to help people navigate the economic landscape. Proper navigation requires a full understanding of risk. What are the risks in our economy, political process, investments, the world?

Make no mistake, the global risks of terrorism have an enormous impact on our global economy. No individual today understands the risks of terrorism more than my friend Larry Johnson, who runs the political blog No Quarter USA. Larry has appeared on several radio and television news shows over the last couple of days to speak about the attempted Christmas Day bombing of Northwest Flight # 253 by Umar Farouk Abdulmutallab.

Given Larry’s extensive background in counterterrorism (he was Deputy Director of Counterterrorism for the State Department), I strongly encourage everyone to listen to his comments.

Thank you Larry for providing such expert professional opinions. Janet Napolitano, Secretary of the Department of Homeland Security, would do well to follow your lead.

A big thank you to C.S. for putting together the following video clips. The first clip is from Larry Johnson’s appearance on last night’s 7PM broadcast of CNN Tonight:

The next video clips are from Larry Johnson’s appearance on last night’s Larry King Live show.

Part I

Part II

The Market’s Greatest Risk

Posted by Larry Doyle on December 3rd, 2009 12:26 PM |

What is the greatest risk in the market currently? Is it the fact that the American consumer remains strapped? Unemployment showing no signs of improvement? Is it the continuation of problems within housing? While all of these issues are significant, I would maintain they are not anywhere close to being the greatest risk in the market. Why? Let’s navigate.

Each of the previously raised points is an economic factor, but the market is trading to a much greater extent based on technicals and excessive liquidity provided by the Fed than any individual or group of fundamental economic statistics.

Thus, let’s return to my original question. What is the greatest risk in the market currently? If the market is being supported by easy money provided by the Fed and that easy money is pressuring the dollar ever lower, then the greatest risk is that the dollar stops its decline. What might precipitate the dollar to increase in value? Coordinated intervention by international trade partners who are disadvantaged by a weak dollar. Could this happen? Without a doubt. In fact, our friends in Japan just started intervening in the currency markets to weaken the yen against the dollar.

The Wall Street Journal highlights this development in the brief video clip, Calls Increase for Japanese Intervention More Acute:

The yen has moved up to a current valuation of 88.14 versus the U.S. dollar from a month end level of 86.38 just this past Monday.

While I have no doubt that our political leaders in Washington are not unhappy with the weakening of our greenback, our international trade partners, such as Japan, are less thrilled. To the extent that these partners fashioned a coordinated response to strengthen the dollar and weaken their own currencies in an attempt to support their own exports, that coordinated effort is ‘the market’s greatest risk.’


Retaining Risk on Wall Street: Necessary but Painful

Posted by Larry Doyle on November 5th, 2009 1:03 PM |

How did Wall Street lead the United States economy into the ditch?

The pure ‘originate to distribute’ model employed on Wall Street spelled the death knell for Wall Street and our economy.

I addressed how firms won under that originate to distribute model in a commentary from November 12, 2008, “The Wall Street Model Is Broken….and Won’t Soon Be Fixed!!”:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Tomorrow has arrived and Wall Street must now deal with the concept of retaining risk in their loan originations. The topic of ‘risk retention’ has been bandied about over the course of the year, but it was ratcheted up dramatically in a recent meeting of the House Financial Services Committee and U.S. Treasury on October 27th.

What came out of that meeting has potentially dramatic implications for the entire spectrum of loan origination, securitization, and distribution businesses on Wall Street and their subsequent impact on Main Street. Let’s navigate. (more…)

Real-Time Information Is “Everything” on Wall Street

Posted by Larry Doyle on October 7th, 2009 3:45 PM |

One of the overriding reasons why I left First Boston in 1990 to join Bear Stearns was Bear’s advanced real-time risk management system. This system allowed me the ability to more proactively manage my trading risk. In the process, I was able to take more risk in the pursuit of greater profit. I became familiar with Bear’s system during the recruiting and interviewing process and was flabbergasted to realize how far behind First Boston was in its capabilities.

Real-time risk management and real-time data processing are critically important for thorough and proper oversight of any financial enterprise. A regulator will be lost in an attempt to maintain market oversight without the proper systems and access to real-time data.

Having heard and read of the systems deficiencies at both the SEC and FINRA, I am concerned at how far behind the curve these regulators are right now and how long it will take for them to recover.

While pondering this topic, I read in Securities Industry News that the SEC is looking to capture real-time data on derivatives transactions. This commentary, SEC Wants to Gather Real-Time Data on Swaps, addresses the exact topic I broached on July 17th in writing, “Can We ‘TRACE’ JP Morgan’s Business?” I wrote:

There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie (Dimon) and his friends on Wall Street are working extremely hard to keep it this way.

In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine.  This system currently only covers transactions within the cash markets and not derivatives.  What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.

Securities Industry News writes:

The Securities and Exchange Commission told Congress today to grant regulators “direct access to real-time data” on credit default swaps (CDS) and other derivatives.

The request comes, the agency said, because the lack of such information hampered its efforts to investigate potential fraud and market manipulation in the over-the-counter (OTC) derivatives markets during last fall’s financial crisis.

The SEC’s enforcement actions in investigating market manipulation in OTC derivatives “were seriously complicated by the lack of a mechanism for promptly obtaining critical information – who traded, how much, and when – that is complete and accurate,” said Henry Hu, the director of the SEC’s new division of risk, strategy and financial innovation, in written testimony to the House Financial Services Committee.

Hu testified that “data on securities-related OTC derivative transactions were not readily available, and needed to be reconstructed manually.” He asked Congress to expand the SEC’s inspection authority over trade data repositories and clearinghouses for derivatives.

The comments represented a rebuke to industry efforts aimed thus far at making more information on CDS and other OTC derivatives data more readily available.

What do we learn here? Information is EVERYTHING!! Wall Street is fighting tooth and nail to protect its golden goose within the derivatives space by hoarding this information.

Why is the SEC even asking for the information? If anybody in Washington truly had a set of cojones, they would merely TELL Wall Street how it is going to work going forward . . . take the information, and fulfill their responsibility to protect the public interest.


Tune in Sunday Evening to NoQuarter Radio’s “Sense on Cents with Larry Doyle”

Posted by Larry Doyle on April 11th, 2009 6:45 PM |

Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. What is truly going on in the economy? Where are markets headed? The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and month and what do they mean for the weeks and months ahead? What is happening overseas and how does that impact us here at home? What is happening in the municipal sector and how will that impact the markets and our personal finances? So much to cover.

My guest will be Louis George Rieger, Chief Investment Strategist at Greenwich Investment Management. Following graduation from Yale Law School, George accepted a position at T. Rowe Price Associates LLC, where he became an officer and stockholder. In 1984, George founded RRH Capital Management, Inc. At RRH, George established the firm’s record in the management of not-rated, tax exempt bonds and high yield equities. George founded Greenwich Investment Management in 2006. George’s legal education has proven valuable in structuring municipal bond issues. He brings over 35 years of experience in the securities industry. (more…)

Mum’s the Word

Posted by Larry Doyle on April 10th, 2009 12:40 PM |

shhhhThe movie Goodfellas provides a wealth of material for comparative analysis of the markets. The “insider activity,” the “fooling around,” “the payoffs,” and “the gambling” all make for great drama on the screen. Truth be told, one does not have to look all that hard to find striking similarities to certain activities in the world of Wall Street, and for that matter, Washington.

One of my favorite scenes in the movie occurs after the boys make the big heist. Immediately, the word is put out to keep your mouths shut and no indications of newfound wealth.

Back to reality. In terms of “putting the fix” into the world of our major money center banks, isn’t the relaxation of the mark-to- market the “newfound wealth”? Isn’t the “keep your mouths shut” the equivalent of the Treasury telling the banks not to comment on results of the Bank Stress Test? Speaking of the Bank Stress Tests, Bloomberg reports:

The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

Clearly the Fed and Treasury are trying to keep their “boys” quiet and lay low while the real regulators of the market, that being honest investors, are walking the beat.

If any of the boys talk, then the leaders of the family won’t be able to coordinate the stories and hoodwink the public.

Whatever happened to, “as long as you tell the truth, you don’t have to worry about having a bad memory”?

It seems we are operating much more in the realm of, “well, I can tell you but . . . ”

The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito

The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito

Henry . . . Jimmy . . . Paulie . . . Tommy . . .

Please let me know who in our government and world of finance are most appropriate to play each of these individuals? Let’s have some fun.

“Beholden to Failed Banksters”

Posted by Larry Doyle on April 9th, 2009 3:56 PM |

Any investor or manager with a degree of experience knows that the “first loss is the best loss.” What do I mean by that? Once the market detects a loss or a weakened position, the price for that asset will remain capped unless and until the asset is sold or liquidated. This price action occurs in every sector of every market.

Welcome to the world of global finance 2009. As banks, insurance companies, hedge funds, and other financial entities deal with losses, we see a lack of aggressive posture being taken on dealing with these losses. Why? Once moral hazard is violated with a single entity, every other entity will look to violate it as well.

Immediate losses are forestalled in hopes that they will be covered or disguised. However, every loss ultimately must be recognized. By whom  and how is the question.

At this juncture, more of the losses in our financial system are being directed toward the taxpayers. How? Via the wide array of government programs. What is the cost? A likely underperforming economy due to a lack of credit, and higher taxes to offset lower revenues.  (more…)

Let’s Meet the 2008 Bond Manager of the Year

Posted by Larry Doyle on April 8th, 2009 3:09 PM |

One of our Economic All-Stars is Bob Rodriguez of First Pacific Advisors. In the spirit of being totally equitable, I should have also posted Tom Atteberry’s name next to Bob’s. Bob and Tom were jointly named 2008 Morningstar Fixed Income Managers of the Year.

Bob is currently taking a leave of absence from First Pacific but Tom is equally outstanding. I had the pleasure of making his acquaintance while I worked at JP Morgan. Tom Atteberry is a pro’s pro. He spoke to Bloomberg earlier today and made these comments, which I took in longhand, so I am not quoting but I listened very carefully. Tom opined:

1. The current environment is the worst time to get into bonds. Why?

2. The creditworthiness of individuals and companies across the economy will only get worse from here and that deteriorating credit is not currently priced into the market.

3. U. S. government debt (Treasuries) represent NO value at current levels. If a fair expected rate of return is between 2-3% and a longer term rate of inflation is also between 2-3%, the rate on a 10 yr. maturity Treasury note should be in the vicinity of 5%. That note is currently trading at 2.85%. Don’t overpay for an asset just because somebody else is, in this case the Federal Reserve. (more…)

IMF Issues Warning on Credit Losses

Posted by Larry Doyle on April 8th, 2009 7:11 AM |

Forecasted credit losses across the residential mortgage, commercial mortgage, consumer credit, and corporate credit markets have been widely estimated to triple – if not potentially quadruple – in certain sectors. What does that mean in terms of total dollars? The IMF sheds light on these losses in an article this morning in the Financial Times:

The International Monetary Fund is likely to raise its estimate of total credit losses on US assets from $2,200bn to about $2,800bn when it releases its Global Financial Stability report later this month

Those figures equate to an increase of 27% in losses and a total figure of $2.8 trillion, which equates to 20% of GDP!!! Is there any wonder why credit is so constrained in the face of these impending losses? The IMF also sheds further light on these projected losses here in the U.S., as well as in Europe, and globally:

The new estimate, while up significantly from January, will almost certainly be lower than a $3,100bn (€2,350bn, £2,111bn) figure circulating on Tuesday, which contributed to pressure on US bank stocks.

The IMF is also expected to release for the first time an estimate of total losses on European assets, which is likely to exceed $1,000bn. The fund is likely to put total losses globally at slightly above $4,000bn, including some additional losses on Asian assets. (more…)

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